Is Yelp Dead Money?

With shares of Yelp (NYSE:YELP) trading at around $20.61, is YELP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Let’s start out by saying that there is still potential for Yelp, but odds are stacked heavily against the company. Yelp is best known for reviews of local places. The best part about the site is that the reviews are detailed, which gives potential customers a good idea of what to expect. However, there have always been questions as to what reviews are real. It’s easy for a company to pay a writer for a positive review. This led to Yelp filtering some reviews. This might have backfired because any real detailed reviews may now be filtered. In simplest terms, it’s difficult to know which reviews to trust.

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Another negative has been competition from Google (NASDAQ:GOOG). That’s certainly not a competition you want to be involved in. Yelp has been holding its own, though. Just when the stock price was moving up slowly but steadily, Facebook (NASDAQ:FB) announced its Graph Search. This feature allows people to search social connections for information friends have shared. This includes restaurants. Yelp dropped 6.17 percent yesterday on this news. Many people will still prefer to use Yelp because of the more detailed reviews, but this Facebook news isn’t going to help matters in any way.

Let’s take a look at some important numbers for Yelp.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for Yelp are strong. This is one of Yelp’s biggest selling points. It increases the odds of Yelp being an acquisition target.

Debt-To-Equity

Cash

Long-Term Debt

YELP

0.00

$123.08 Million

$0

GOOG

0.09

$45.72 Billion

$2.99 Billion

FB

0.04

$10.45 Billion

$530.00 Million

 

T = Technicals on the Stock Chart Are Mixed

Yelp had just been gaining momentum. Now that trend might reverse. It’s possible that some traders will look at yesterday as a buying opportunity, but there aren’t any known near-term catalysts to drive the stock back up.

1 Month

Year-To-Date

1 Year

3 Year

YELP

6.22%

9.66%

-5.92%

-5.92%

GOOG

0.92%

0.14%

13.35%

22.12%

FB

9.32%

10.11%

-5.33%

-5.33%

 

At $20.61, Yelp is trading above its 50-day SMA, and below its 100-day SMA and 200-day SMA.

50-Day SMA

19.26

100-Day SMA

21.92

200-Day SMA

21.98

 

E = Earnings Have Been Poor

Yelp has yet to show a profit. However, revenue has been increasing on an annual basis. This might remind some investors and traders of 1999.

2007

2008

2009

2010

2011

Revenue ($)in millions

3.75

12.14

25.81

47.73

83.28

Diluted EPS ($)

0.00

-0.16

-0.19

-0.71

-1.10

 

When we look at last quarter on a YoY basis, we see an improvement in revenue and earnings.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

22.30

24.90

27.38

32.65

36.37

Diluted EPS ($)

-0.24

-0.59

-0.31

-0.03

-0.03

 

T = Trends Support the Industry, But Not the Company  

There will always be demand for online reviews. Demand is likely to increase dramatically as time goes on. However, it’s the bigger players with more tools that will increase exposure for this aspect of their businesses. Yelp simply can’t compete in this arena unless it finds ways to make itself more unique.

Conclusion

Yelp only has two things going for it, which are revenue growth and a strong balance sheet. Otherwise, this is an unprofitable company with a short interest of 63.70 percent and a Forward P/E of 1,030. That’s an easy pass. Yelp expects to be profitable in H2 2013, but that looks like a long shot from here.

Yelp is a STAY AWAY.

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